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Rodenbach's novel Bruges la Morte had already been adapted by the author into a play. The play was translated into German by Siegfried Trebitsch under the title Die stille Stadt (The Silent City), which he later changed to Das Trugbild (The Mirage). Trebitsch was a friend of Korngold's father Julius. The two met in the street one day and got into a conversation about a possible operatic adaptation. Trebitsch later met Erich, who was enthusiastic about the project. Trebitsch recalled "[I] met the young master Erich Wolfgang Korngold in search of a scenario or, even better, a mood or operatic background that could be dramatically elaborated. I urged him to take up Das Trugbild."[1] Julius commented on the way the project evolved:

As soon as Erich read the play, he drafted a scenario for a one-acter, but Hans Müller urged him to get away from one-act operas and he sketched the first of three acts in prose. However, his work on two of his own plays prevented him from getting much further, and since his prose was wordy and unsingable anyway, we gladly excused him from the task.[1]

Father and son decided to adapt the play themselves, and co-wrote the libretto, using the pseudonym Paul Schott. Julius decided to change the plot so that the murder occurs in a dream, rather than in actuality, as in the original. Korngold started the composition in 1916. He left it for a year to take up military service before resuming and completing the score.[1]

When Die tote Stadt had its premiere on December 4, 1920, Korngold was just 23 years old with two short one-act operas, Der Ring des Polykrates and Violanta, already to his name. The success of these earlier works was so great that Die tote Stadt was subject to a fierce competition among German theatres for the right to the world premiere. In the end, an unusual double premiere was arranged and the opera opened simultaneously at the Stadttheater Hamburg and Cologne (Glockengasse). In Cologne, the conductor was Otto Klemperer, and his wife Johanna Geisler (de) sang Marietta. In Hamburg, Korngold himself was in the theatre, and the conductor was Egon Pollak. The opera's theme of overcoming the loss of a loved one resonated with contemporary audiences of the 1920s who had just come through the trauma and grief of World War I, and this undoubtedly fueled the work's popularity.

Die tote Stadt was one of the greatest hits of the 1920s. Within two years of its premiere it had circled the globe, including several performances at the Metropolitan Opera in New York City.

The French premiere of the opera took place in a concert performance in 1982 at the Paris Théâtre des Champs-Élysées. The first French staged performance was in April 2001 in Strasbourg under the baton of Jan Latham-Koenig with Torsten Kerl (Paul) and Angela Denoke (Marietta).

When the opera opens, Paul, a younger middle-class man whose young wife, Marie, has recently died, cannot come to terms with the sad reality of her death. He keeps a "Temple of Memories" in her honor, including paintings, photographs and a lock of her hair. When his friend Frank pays him a visit at his house and urges him to honor Marie by moving on with his life, Paul flies into a rant, and insists that Marie "still lives." He tells Frank that he has met a woman on the streets of Bruges who exactly resembles Marie (indeed, Paul thinks that it is Marie) and invited her back to his home.

Soon, the woman, Marietta, a young and beautiful dancer, appears for her rendezvous with Paul. They talk, she is put off by his odd behavior, but persists in trying to interest him in her charms—she sings (Lute Song, "Glück das mir verblieb") and dances seductively, but eventually gets bored and leaves. Paul meanwhile is driven to a state of extreme anxiety.

Torn between his loyalty to Marie and his interest in Marietta he collapses into a chair and begins to hallucinate. He sees Marie's ghost step out of her portrait and urge him not to forget her, but then the vision of Marie changes and tells Paul to go and move on with his life.

After a series of visions in which his pursuit of Marietta alienates him from all his remaining friends, the act ends with Marietta finally overcoming his resistance and leading him offstage locked in a passionate embrace. All this takes place in Paul's imagination.

Paul's vision continues. Back in his house, living with Marietta, he quarrels with her. She gets fed up with his quirks and continuing obsession with Marie and starts to taunt him by dancing seductively while stroking his dead wife's hair. In a rage, Paul grabs the lock of hair and strangles Marietta. Holding her dead body he exclaims "Now she is exactly like Marie." Then he snaps out of his dream. Astonished that Marietta's body is nowhere to be found, he has barely had time to collect his thoughts when his maid informs him that Marietta has come back to pick up her umbrella which she left in the house when she departed a few minutes ago. With the shock of the traumatic dream still fresh in his mind, Paul is met by his friends Brigitta and Frank who note that though Paul's vision is there, his desire is dead. Frank begins to leave and asks if Paul will leave, to which he replies, "I will try to". The opera ends with a reprise of "Glück, das mir verblieb" sung by Paul in what is apparently his last time in his "Temple of Memories".